In short:
Resources are limited in quantity and can be put to many alternative uses, so economies must choose.
We have seen that we must make choices. Let us now see why.
What are resources?
Resources
are the factors used for the production of goods and services.
Type of resource
What it means
Example
Natural resources
Found in nature
Water, coal
Human-made resources
Made by people
Capital and technology, such as machines and electricity
What are the factors of production?
The
factors of production
are the economic resources needed to produce goods and services.
Example
- land, labour, capital and technology.
Factor
Example in a shirt factory
Land
The land on which the factory stands, and the water it uses
Labour
The workers who cut and stitch the cloth
Capital
The sewing machines
Technology
An automatic cloth-cutting machine
Why do we have to make choices about resources?
Both natural and human-made resources are limited in quantity.
The same resource can be put to many different uses.
Example 1
- the same money can buy fruit, or a pair of shoes.
Example 2
- the same steel can be used for medical equipment, aircraft or refrigerators.
How do economies have to make choices?
An economy has both producers and consumers.
Consumers have to choose what to consume.
Example
- with the same money, a family can buy fruit or a pair of shoes.
Producers have to choose what to produce.
Example
- a farmer with one field can grow barley or wheat.
So economies also have to decide how to use their scarce resources in the best possible way.
The aim is to meet unlimited wants and to improve people's quality of life.
How does a farmer choose what to produce?
A farmer has one piece of land, and can grow either barley or wheat on it.
The land, the water and the labour are limited.
So the farmer has to decide how much of each crop to grow.
Combination
Barley (in kg)
Wheat (in kg)
A
0
100
B
25
90
C
50
70
D
75
40
E
100
0
Moving from combination A to combination E, the farmer grows more barley and less wheat.
To grow more barley, some wheat has to be given up.
What is opportunity cost?
When one option is chosen, the other options are given up.
Opportunity cost
is the value of what is given up.
Example 1
- the wheat the farmer gives up is the opportunity cost of growing more barley.
Example 2
- if pocket money is spent on snacks, the shoes given up are the opportunity cost.
What opportunity cost means
Option chosen
Grow more barley
Option given up
Some wheat
↓
Opportunity cost = the value of the wheat given up
Same idea with pocket money: choosing snacks means the shoes given up are the opportunity cost.
What is the Production Possibility Curve?
Production Possibility Curve (PPC)
is the curve showing the different combinations of goods that can be produced using all the available resources, which are limited.
How is the PPC made?
Let us take the same barley and wheat example.
Combination
Barley (in kg)
Wheat (in kg)
A
0
100
B
25
90
C
50
70
D
75
40
E
100
0
On the x-axis, we show the quantity of barley in kg.
On the y-axis, we show the quantity of wheat in kg.
Each combination is then marked as a point - A, B, C, D and E.
When these points are joined, we get a downward sloping curve.
This curve is the Production Possibility Curve.
The Production Possibility Curve - each point shows one combination of barley and wheat. Schematic, not to scale.
What do the points on the PPC tell us?
The curve shows the trade-off between barley and wheat.
If more barley is produced, some quantity of wheat has to be sacrificed.
And if more wheat is produced, some quantity of barley has to be sacrificed.
This is called a trade-off.
Every point on the PPC shows the maximum output that can be produced.
This is possible only when resources are used efficiently and nothing is wasted.
It helps enterprises and governments in better planning and decision-making.
🔎 LET'S EXPLORE
Ask your parents about how they make choices for everyday purchase. What is the opportunity cost of making a particular decision?
Parents have a fixed amount to spend each month, so they pick what is needed most.
Example
- buying a school bag this month means the new curtains are put off. The curtains are the opportunity cost.
How do you decide to spend your time? Is time a scarce resource?
Yes, time is a scarce resource, because a day has only 24 hours.
An hour spent playing is an hour not spent studying, and that is its opportunity cost.
📖 Questions from the Book
Q3. Can you think of a resource in your region that is scarce but used wastefully? How could it be managed better?
Water is scarce in most regions, but a lot of it is wasted.
Example
- taps left running, leaking pipes, and washing vehicles with a hose.
It can be managed better by repairing leaks, using buckets instead of running water, and saving rainwater.
Q6. A student has Rs 100 and must choose between buying a notebook or saving the money for buying a tennis racket later. Which economic concept best explains this situation? a. Demand b. Opportunity cost c. Production d. Inflation
The answer is
b. Opportunity cost
.
The student can pick only one, so the value of the option given up is the opportunity cost.
Demand is wrong, because demand is about how much of a good buyers want to buy.
Production is wrong, because nothing is being produced here.
Inflation is wrong, because inflation is about a general rise in prices.
Q7. How does understanding opportunity cost improve the quality of economic decision-making?
It shows that every choice has a cost, even when no extra money is spent.
It makes us compare what we gain with what we give up.
So the option with the greater benefit is picked, and resources are not wasted.
Worth remembering:
Opportunity cost is not the money we spend. It is the value of the option we gave up.
Quick self-check
1. What is opportunity cost?
Show answer
Hide answer
The value of the option that is given up when another option is chosen.
2. If a farmer grows more barley on the same land, what happens to the wheat?
Show answer
Hide answer
Less wheat is grown, and that wheat is the opportunity cost of the barley.
3. What does every point on the PPC show?
Show answer
Hide answer
The maximum output that can be produced when resources are used efficiently, without waste.
📝 What Have We Learned
Resources are limited in quantity and can be put to many alternative uses, so economies must choose.
Opportunity cost is the value of the option that is given up, like the wheat a farmer gives up to grow more barley.
The Production Possibility Curve shows the trade-off between two goods, and every point on it is the maximum output possible.
CA Maninder Singh is a Chartered Accountant with 16+ years of practical experience and 20+ years of teaching experience. At Teachoo, he simplifies Accounts, Tax and GST with step-by-step examples so students can apply concepts confidently in exams and real life.
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